The result of Labour's energy price freeze would be worse customer service and
more power failures, writes Jesse Norman.

Jeremy Warner has rightly highlighted the economic illiteracy of Ed Miliband’s speech yesterday, and in particular his commitment to cap the prices of electricity and gas from 2015-17. But let’s explore the issue in a bit more detail.

Here’s what Miliband said:

Labour will have a world-leading commitment in government to take all of the carbon out of our energy by 2030... In the 1990s we committed to a dynamic market economy. Think of those words: ‘dynamic, ‘market’, ‘economy’. And then think about this, what happens when competition fails? What happens when it just fails again and again and again? Then government has to act...

Take the gas and electricity companies. We need successful energy companies, in Britain. We need them to invest for the future. But you need to get a fair deal and frankly, there will never be public consent for that investment unless you do get a fair deal. And the system is broken and we are going to fix it. If we win the election in 2015 the next Labour government will freeze gas and electricity prices until the start of 2017. Your bills will not rise.

This is a masterclass in dishonest populism. Is there a problem with the relentless rise of gas and electricity prices? Yes, of course; no one disputes that. That’s why political parties of every stripe have focused on the cost of living.

Are the gas and electricity industries operating well? No; and few if any people would say they were. The truth is that over time these industries have become vertically integrated oligopolies in which six companies collectively set both retail and wholesale prices, given world markets.

There is limited internal competition and virtually no threat of new competitors entering. The energy companies in turn operate within an enormously complex regulatory system designed to encourage investment in infrastructure, comply with environmental and other commitments, and permit a return to their investors. That system is not working very well, and there is much that could be improved by careful review and reshaping of incentives by government.

But hold on a second: how did we get here? Might the 13 years of a Labour government have had anything to do with it? What about the Competition Act 1998, the Utilities Act 2000, the Enterprise Act 2002 and the Energy Acts of 2004, 2008 and 2010, all passed under Messrs Blair and Brown? Might they have helped to push up energy prices?

Come to that, didn’t Ofgem remove price controls between 2000 and 2002 under a Labour government? And wasn’t the Secretary of State for Energy and Climate Change in 2008-10 one E. Miliband? Correct me if I’m wrong, but I don’t recall these radical policy ideas coming from him when he had the chance to put them into practice.

Secondly, let’s imagine (frighteningly) that Labour win and implement their policy of fixing gas and electricity prices. The policy is hopelessly cloudy and ill thought-through. Every single price, or the overall level of prices? Unclear. Would there be a rule preventing the companies from introducing new offers which might be at higher prices? Unclear. What about blended offers? Unclear.

Would prices be fixed in nominal or real terms (i.e. only rising with inflation)? Presumably nominal, or prices would rise in 2016. Would people still be able to shift to cheaper tariffs? Presumably yes. Is Miliband proposing that the taxpayer recompense the energy companies for the lost revenue? Presumably no.

So the effect of this is to hand a series of private companies a large and ratcheted real cut in revenue, made worse if global energy prices then rise. How will those companies react? Almost certainly by cutting costs and investment. Result: worse customer service and more power failures. A drop in resilience for an already rather fragile industry. A signal to potential investors in new nuclear and green generating plants that anticipated returns may be undermined by government fiat even given existing contractual arrangements.

But here’s the most depressing thing. Ed Miliband’s speech has been lauded on the Left as a radical and empowering new vision for Labour. Its policies, including this energy policy, have reportedly been focus-grouped to death. But the truth is that the whole exercise rests on an unreconstructed and deeply cynical and patronising Blairite view of the voter.

The people of this country are not stupid. They know all too well that the cost of living is a serious issue. But they can also see that this soundbite “policy” is a 1980s-style recipe for disaster. Same old Labour. What a shame.

Jesse Norman MP sits on the Treasury Select Committee. His biography of Edmund Burke has been long-listed for the Samuel Johnson Prize.